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I've made the questionable call of skipping the lunch portion of the Options Industry Council conference, at which Tom Wolfe is speaking, to return to the office for a bit. It's a decision I'm already regretting, as it perfectly coincided with this Philly Fed-induced selloff. Instead of being entertained by one of the master commentators on capitalism and capturing the current zeitgeist, I'm now trying to decipher some meaning from every little tick on the screen.

Well, some big-picture bullish elements -- such as lower fuel costs, a halt in the increase in interest rates, and the fact that the

S&P 500

chart remains in an uptrend with good support at 1280-1290 -- are still in place.

But other elements are telling a different story. The VIX was down to 11.20 this morning, and the put/call reading on index products was running at just 0.85 at midday, its lowest reading and first time below 1.0 in more than a year. Yesterday's

Investor Intelligence

poll showed bulls increasing to 47.5% vs. 33% bears, its widest spread in five months. Such sentiment readings all suggest the market is vulnerable to a sharp pullback in the near term.

Anyway, here's a preview of some big themes being discussed at the conference:

Industry consolidation:

It's important to distinguish between intra-asset combinations -- that is, exchanges with overlapping products that hope to realize cost savings and gain pricing power -- and inter-asset expansion, in which exchanges push into other asset classes, an effort that should ultimately lead to equities, futures and options trading on a single platform. Generally speaking, the former would benefit the exchanges, while the latter would be a positive for customers.

Liquidity:

This issue covers a lot of ground and taps into many of the driving forces behind past and future changes in the industry. At the bottom is the basic issue of how the control and revenue created by trading activity -- from price discovery to the dissemination of market data to the consummation of transactions -- should be divvied up. The battle lines between the exchanges, which act as a third-party facilitator and point of centralization, and the broker/dealers, which provide the actual liquidity from which the revenue streams are generated, are not always clearly marked. More broker/dealers and even hedge funds are becoming participating partners in exchanges, or they launch their own trading platforms.

Regulation:

As exchanges go global and become multi-asset platforms, the regulatory bodies need to combine and co-operate not only domestically between the

SEC

and

CFTC

, but also internationally to create a seamless and consistent set of rules and regulatory environment that is both protective against abuses yet inviting of innovation and competition.

The bottom line on this one seems to be that regulation will always be a step or two behind competition, and rules will mainly be made in response to developments rather than in anticipation of events. An example is that the CFTC has been debating for months whether it should have jurisdiction over

Intercontinental Exchange

(ICE) - Get Report

, the Atlanta-based but U.K-owned energy exchange. By the time any decision is reached, it should be moot, as the ICE is setting to merge with the

New York Board of Trade

.

Trading options in pennies:

It's set to begin in early 2007, but the pace of the rollout is not yet set. The exchanges are taking a diplomatic stance that they will go along, but my gut tells me they can't be happy about it. The costs of quoting and disseminating data in pennies will be high in terms of upgrading technology and devoting bandwidth, and it further shaves the margins of specialists and market makers.

An unforeseen impact of trading in pennies is that it might finally lead to a consolidation among the six option exchanges as they look to cut costs and regain some pricing power in terms of fees and market data revenue.

Steven Smith writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He was a seatholding member of the Chicago Board of Trade (CBOT) and the Chicago Board Options Exchange (CBOE) from May 1989 to August 1995. During that six-year period, he traded multiple markets for his own personal account and acted as an executing broker for third-party accounts. He appreciates your feedback;

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